Surveillance: Buying Opportunity with Slimmon

record of people. He is in the nineties seven percentile of three year performance and in the last year's tumult defeated the Standard and Poors five hundred by what's called seven thirty one basis points that seven plus out performance off sp X. He is so alone, Well, he has time to come on with us. Andrew Slimmon Joints Senior Portfolio May Morgan Stanley, let me look back, Andrew, how

did you do that in two thousand twenty one? Well, I think what really worked for us was to most people owned too many gross socks and starting to increase the exposure to box and owning some energy and financials that that really distinguished. Look. I think the S and

P has become a growth index. Top ten stocks are largely gross stock tech stocks, so tacking away from that UH and being overweight some of the value areas in a year where they're working, and they certainly are so far that you know that that you can drive you know, look at the end of the at the end of the seventies and top ten socks r energy socks and now the top ten of tech socks. So I think

it's uh, it's a great opportunity for active management. You published this morning that what we're seeing here in our international relations, in our fractured moment to moments UH focus

is a buying opportunity. Why is that, Well, look, I'm certain because if you look at ten percent corrections on average, twelve months later, you're up a lot, even if they morph into much worse worse in ten percent corrections, about half of the ten percent corrections become fiftent corrections, and a quarter of the ten percent of corrections become twent corrections. But even if you look out a year, if you bought down ten percent, it might get ugly earlier, which

I think it will this time. Again, a year later, you've been well served to step up into those corrects. Andrew, you just we're talking about the importance of active management. We've been talking about the turn under the surface. Some big winners. I'm thinking of energy, some big big losers. I'm thinking of certain tech stocks. What do you buy if this is a buying opportunity, Well, I think you still well, So look on the surf. I'm really changing

my tune a little bit since i've been on. Last year, I was on and I kept saying, look, the uber grow the the real high flying growth tocks are too expensive,

but I don't think the quality grows socks are as expensive. Well, you know what, those high flying grows socks have come down so much, and they actually the quality grows socks have held in there that now the pricing is shifted, and I think the safer gross socks, which are the mega cap tech stocks, are more vulnerable because these uh, you know, the high flying gross socks are just been so thoroughly trashed. So at the end of the day,

the opportunity remains in the value stocks. Look, if the FED, this is the very important part. If the FED was going to over tighten and kill the economy, cyclical stocks wouldn't be outperforming trasier yields would be dropping, right, they're not. It tells grows there would be a growth rotation at

a growth tox that's not happening. That tells me as much as the discussion about how many times the Feds going to raise rates, They're probably not going to raise rates as much as some of these predictions because the market is telling me to stick with the economically sensitive stocks,

and I think that's where you want to be. Although a lot of people are looking at the yield curve which is contracting and some of the narrowest levels that we've seen since the beginning of the pandemic and saying, actually, recession risk is real, growth scares are real, and frankly, we're not saying that baked in some of these stocks, which means that perhaps they are more vulnerable. How do you push against that? Well, that's true. I mean, yeah,

you're absolutely right. The yield curve yesterday came down a bit. We'll have to see, you know, it has come down and then it bounces back. Usually as it gets closer to zero, it becomes a tougher, more stubb We'll have to see high yield spreads, investment grade spreads haven't blown out that much, so I'm watching. I'm still sticking with this stick to the stick to the value trade. I still think you'd see a much bigger rally and treasury yields uh than we saw yesterday if, in fact recessions

around the corner. And then the other thing that I would push back is what no one seems to be talking about is, Lisa, do you know that the estimate for the SMP is higher today than it was at the beginning of the year. Estimates keep going up. Yes, I understand they're not going up at the same rate they did before, but the fact is companies continue to do better than what was estimate at the beginning of the year. That's bullish. It's bullish, but we've got to

do something here. Andrew, how much cash do you hold right now? I mean, with your track record, I think people really want to know that confidence is displayed by cash and portfolio. Yeah. Tom, I've heard you asked that

question before, and I think it's a little uh. You know, if when manager said, well, I don't like the market and I've raised cash, I find that a little misleading because at the end of the day, what is it if the markets down ten and you raise five percent cash or ten percent cash, You're gonna lose money, right,

You're gonna lose money. So so you know, to suggest that if I raise cash, I won't lose money as an equity long manager, I think that's very misleading because at the end of day, no one's giving me investing in my fund to go to eight percent cash. I'm a long equity manager. I hope to god I do better on the downside than the than the markets. But I'm invested. So the only question is how much will

investors panic and liquidate? And we have seen redemptions the last few days that, unfortunately, tragically, that's normal market draw us in. As much as I'm saying, hey, it's a buying opportunity, people hit the panic button, and I suppose after today we'll see inflows. Andrew, just to sort of tie this all together, if someone was listening to this interview, that might come away saying, all right, go all in on pinterest and Twitter? Is that your Was that your

point here? No? I don't think so. I think those stocks, uh are not not specifically those stocks, with just those stocks in general, they the carnage is so great. I'm not sure. I wouldn't recommend people to run out and sell them. I think they could bounce, but I don't think that's the big opportunity. I still think it's in the value names, but I just want to stress I'm a core manager. I'm looking for the fast pitch. I still think it's in the cyclical stocks, because we're gonna

get some more ugly insulation prints. And think about this, right, Lisa, Yesterday financials out the market got crunched in financials outperformed. Think about since the Great Financial Crisis, every time the market went down, a lot financials got destroyed. And they're not. They're actually leading in the downturn. That's very unusual. So I'm pardoned to see that even in the downturn, some of the cyclical era seemingly are leading and usual one

of the best. We've gotta go. It's gonna catch up by a wise interested them in that of Morgan Stanley Investment Management. It was an essay in the Financial Times a number of days ago from Jeffrey Sachs of Columbia University talking not of appeasement, but how do we, after the debris of all this move forward with Russia. The authority of Jeff Sex here is truly, truly enormous, and goes back to January with his advisement to a Yeltson regime that then changed to something different when Jeff Sex

got off the airplane at JFK. That interview was shocking. Professor sexing US of Course of Columbia University this morning, Jeff Sex, we all got Boris Yeltson wrong? Do we get Mr Putin wrong? Well, I think we've got our

own policies not right. And we have been on a very provocative course of really NATO enlargement seen by the Russian side as encircling Russia, a point that has been made actually for more than thirty years, first by the Soviet Union, by Mr Gorbachev, then by President Yeltson, now by Putin. We don't want to think about that in the US. We don't want to discuss it. We're dishonest because the West, the leaders said clearly to Mr Gorbachev and to Putin and I'm sorry and to Yeltson, no

enlargement to the East. Then Clinton decided, because of the pressures domestically and from Central European countries, that NATO would enlarge. It was predicted by many at the time, including Clinton's own Defense secretary William Perry, that this was a very dangerous and provocative move. And now we're here, we need

diplomacy on our side. All we're doing right now is sacrificing Ukraine in the name of a theory, because if you talk to senior officials, they say, oh, there's no way Ukraine's actually going to join NATO, but then they say publicly, of course, Ukraine has every right to join NATO. If you put the two together, it's the worst combination for Ukraine's security. Jeff, what's so important here is I've got Jeff Sex, the liberal from Colombia. On the same

page is Mersheimer Chicago, the arch servative real politic. I mean, that is truly extraordinary to steal a phrase from a younger Jeff Sex. What is the diplomatic shock therapy to jump start a legitimate dialogue to come to a good resolution here we need basic points agreed, Russia out of Ukraine, Ukraine's sovereignty assured, NATO not enlarging into Ukraine, the mints to agreement being implemented for basic points, they're not so hard to come to the table, except actually the difficulty

is on the NATO side. NATO says, oh, everyone has the right to join, as if it's some great, somehow moral right to have a military alliance that increasingly runs up against the border of an antagonist. That's not a right. That's just imprudent, is what it is. But Jeffrey, you're talking about diplomacy. Can we have diplomacy? If people question whether Vladimir Putin is a rational actor, it's it's a great question. You cannot test that theory if you don't

have diplomacy. What Putent said in his speech a couple of days ago is we called for new security arrangements, the United States would not even discuss them. That is the truth. The US said first moment NATO is open for enlargement. It is the right of Ukraine. Well, I don't call that smart diplomacy. Uh. And then when uh, the response is a failure, which was predictable, we say, well, nothing could have worked. My view is we should try real diplomacy. It might not work. It might not work,

but if you don't try it, you can't tell. And what's always true in negotiations throughout history is if you start with the premise that the counterpart is just a madman. If you start with that premise, you will absolutely end up in conflict. There's no way to reach an agreement on that starting point. It may be true that the counterpart isn't interested in negotiation, but you can't find that out by talking to yourself, So you have to talk

to the other side. Jeffrey, we're talking tactics right now and how to avoid some sort of altercation. But longer term strategy. You specialize in sustainability, and I do wonder what type of investment would be necessary now in order to immunize both the US and frankly, even more so the European economies from the vulnerability of dependency on Russia for oil and gas. The truth is we ought to

be dependent overwhelmingly on our sunshine. That's the whole idea of the decarbonization agenda, which is a massive increase of solar and wind power to replace fossil few wolves. Why are we in yet another fossil fuel crisis. By the way, this is where I entered the economics. I won't tell you how many decades ago, writing about the oil shocks

of the nineteen seventies. We can get away from that, because if we're relying on our own sunshine with solar fields are on our offshore wind or on our wind in the US Midwest, we are not going to be

suffering what we're going to be suffering right now. So that's actually a pretty straightforward approach and the one we ought to be taking anyway, Jeff, and the time we've got left, And very importantly, you make the the assumption here that the West is talking to itself instead of talking in a more formal diplomacy to the oddities of the Kremlin. The Democratic Party and the liberals of the Democratic Party and progresses all agree are going down in

flames at the next election. Whether that's true or not, we'll find out in November. Are the progressives in this nation guilty of talking to themselves and not reaching out for compromise with the Biden moderates or indeed the GOP moderates. I just think there's a lot of bad strategy going on. I am unimpressed with the diplomacy of this administration. I kind of well, let's just say I'm unimpressed, and I'm

unimpressed with the strategy on the domestic policy. Senator Joe Manchin, with whom I often do not agree, put forward a very reasonable proposition. Raise taxes, use some of it to reduce the debt, use some of it for the social programs. That's a point of the left. Meet the gentleman from West Virginia. It clearly it broke for the left. How did it break for the left? Well, it has to start with the White House, Frankly. That's the job of the President and the White House to coordinate. How you

could have this situation and not reach an agreement. Is is really disappointing, frankly, because there is an agreement to be had. Even a Senator Mansion sketched it out in the last couple of weeks. I said, Okay, here we go. But they don't move. And it's really not so understandable. Tom. It's a good question. I don't have a good answer

for it, Professor. Thanks for bam with us today. Jeffrey snacks that Columbia University right now one bonds and when an incredibly smart note he credit sizes Winning Caesar, global head of Strategy and Winning I love what you say about capturing little bits of movement here where it's not about yield change, but it's trying to find in fixed income where price will go up. Where is that? What part of fixed income do I find little bits of ice moving up? Good morning everyone, thanks for having me.

That's a great point. And what we've noticed is the belly of the curve and investment grade you're actually now trading at a discount to par, which very rarely happens, right, I mean, usually in the investment grade market, investors are going to expect to be made whole at par, and you don't see these discounts outside of very stressed period of times all that often. And so we are recommending that investors take a look at the belly of the curve.

And then also in high yield, we've now started to see bond prices trade at a discount to part and that market is a much different market than it was in the mid two thousand's, and really the leverage to energy in that market is a fairly positive thing. Um with all of the geopolitical risks and and kind of Russia Ukraine headlines, we got some major jargon going on here, folks. See if I level one, the belly of the curve is identifiable. But when do you seriously here, how do

you define the belly the curve? Yes, I did have the jargon speak, so we like the five to ten year segment of the curve, so not really long duration, you know that thirty year segment of the curve, but just extending a little bit so you don't have a really kind of inflated front end portfolio into the point of curve curveew where you actually see a lot of new issue, which also helps when you're looking for liquidity

and adding to portfolios and sizes. When taking a look at the broader credit complex, a lot of people say, we are not heading towards another credit crisis by any means, because companies have done such a good job of kicking the can down the road of extending out the maturities, of getting their financing as cheap as possible. But are you starting to see that window for cheap financing really close up? What we're beginning to see is the opportunistic

window shutting. So for those issuers who are really trying to aggressively address capital structure and refinance, I think that that window has closed. We've already hit the all time low point and yields in both investment grade and high yield, and now it's about kind of picking your spots where

those types of opportunities still makes sense. The energy sector is one such spector where we think that refinancing is probably going to continue because you've had a bit of a later recovery in that sector for issuers, and borrowing costs are still pretty attractive all things considered. Now, overall, we don't think that the moving yields has become a threat to either investment grade or high yields quite yet.

Companies can still borrow at very low levels all overall, and this kind of flow down a new issue supply that's just a natural effect of volatility in the market is actually very constructive technically for the market when there are two issues here, and this is something a lot of people have been trying to wrap their heads around. On one hand, you could potentially get a rates driven sell off in the credit market, at what point does

that lead to some sort of corporate credit response? In other words, it's not going to affect these corporations because their financing is so cheap and they don't need more money. So at what point are we kind of immunized because you see a pretty big sell off in evaluations of some of these credits, but even see companies with very solid balance sheets. So what you ultimately need to have is this kind of spiral of rates volatility driving spread volatility,

which drives really negative total return losses and portfolios. And then when investors go and look at their you know, Q one two statements and say, oh, my gosh, why are my investment grade bonds down seven percent this quarter? And then they start selling into that down market, and you get this kind of spiral of spread widening more

and liquidity really gets cut off from the market. Now, given the amount of cash still on the sidelines, we feel fairly confident that there will be a clearing level where institutions step back in and say, oh, actually, you know, ten year credit looks pretty attractive at three and a half percent. But we haven't quite reached that point yet.

We were thinking three to three and a half percent in investment grade as the level where institutional investors would kind of step back in, But given the rush of Ukraine headlines, I think that that's keeping people kind of sitting on their cash a little bit longer than we would have expected when he thank you as always going ahead from you when he sees that of credit size. I've got unity at Knight's Hotel, and we've got unity with Alice. That's the good news. The bad news for

some people. And where the criticism has come from that those sanctions that they delivered Tom aren't strong enough, that lightweight, Well they're lightweight. And again the key thing here is now the response from Mr Putin. She gave us a wonderful brief a number of days ago. We're thrilled to bring back Tina Fordum I had a global political strategy, and Evan Hurst just thrilled she could be with us.

And this morning, Tina, I read the Putin speech you did with all your professional ability, and I mentioned I believe it was yesterday a Lenin and the Bolsheviks. You go even further back to the eighteenth century and Catherine the Great, piecing together what Peter the Great uh rought. How does Putin go back to Catherine the Great? I

think we should interpret those remarks as his aspirations. But you know, without giving away my trade secrets, if I've been any good at anticipating developments with respect to Russia, it's because I'm taking put In at face value. He is telling us what he wants. I think he's also moved the from I mean, I never thought he was a chess grand master, but from somebody tactical to somebody's concerned about legacy. So that's what this is about. What

does the Soviet people want? Would you suggest the Soviet people excuse me, the Russian people I misspeak there. Seriously, folks, do you believe that the Russian people parts between Lenin and Stalin as he did in the speech, or that the Russian people care about empire? So, first of all, we don't really have very good sources of public opinion

data about what Russian people think. They are concerned about what they hear on you know, Russia, Russia Today and and other domestic channels, which is that Russian speakers in those so called breakaway republics are being abused. UM. And that's where the risk of a false flag incident comes in. UM. This notion that Putin is trying to project saying that Ukraine is not a real country because of the borders

drawn by Lettin, etcetera, has been masterfully deconstructed. By the way, if you haven't seen this speech yesterday at the United Nations from the Kenyan Ambassador to the U n UM. He talks about how if we're going to revise the borders and reconsider the sovereignty of every country that came out of empire, um, where do we start? And that that the ken yeah and other African nations, which of course came out of colonial borders also largely arbitrarily drawn,

don't want to go there. That's the risk of what Putin is talking about by denying the sovereignty, the right to exist of Ukraine. And that's why this isn't about just these breakaway republic don edskar luhansk Oh. If the global order doesn't respect except sovereignty and borders, then we have no water tin that. I think most people would agree on that. What's interesting for me right now is

just how effective these sanctions might be. Team that they seem to be sanctioning again the high net worth individuals, the Oligar incident around President Putin. I wonder how effective that's going to be. I watched that National Security Council meeting that was broadcast on Russian TV. They didn't seem like the kind of individuals that were about to turn around. It's how President Putin he should change course. Do you think that this will be effective to go after the

people with money, the people close to President Putin? Of course it's not enough. But let's also remember, in fairness to the sanctions drafters who have a very tough job, that they're also attempting to sequence the sanctions, right, so to start with one wave, um, the EU sanctions have gone further, by the way, Jonathan, the EU has sanctioned all of the parliamentarians, hundreds of them in the Duma,

who supported this move. But if there is a full blown invasion, as U S intelligence seems to be warning, I also think Putin will go further. I don't buy what I'm seeing in some investment research that we're going to see a de escalation. I see the opposite, We'll see another round of sanctions. So you don't want to you know, you want to keep some powder dry in

the event of of a worse event. But what I think markets are not giving enough attention to, and I listened with great interest to the previous guests and the and the bullishness, is the risk of a of a catastrophic incident we are in what clauses what's called the fog of war and Russia has nuclear weapons. Well, Tina, then what are you advising clients to do? I mean, how do you factor in that risk, that tail risk

that perhaps in your view is becoming more real. Well, I think we moved from a tail risk a long time ago. And one of the things that I've I've been advising my clients for many years now is not to think in terms of a base case and a tail risk, but rather clause Heble scenario. So we need to test a stress test portfolios against that. I don't disagree with the immediate conclusion of market participants that, um, if anything, a geopolitical risk incident may you know, keep

rates lower for longer, but not not yet. I think the more worrying point really is about supply disruptions and you know, the international system. How does it impact investor portfolios? We are Russia has given us a very clear signal that it is not coming back into the fold, that it doesn't really care about sanctions, and that it is not a reliable partner. And in my twenty five years of watching Russia, this is this is a real change in trend. We're not going back Tina. Wonderful to catch

him with you. Some really strong words that Tina Fordon of Avon Hurst, they head of global political research at Strategy. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg